As a child, gas prices at my local 76 were insignificant numbers on a board, but having recently earned my driver’s license, the cost of getting around town now comes out of my own wallet. As a result, I pay much more attention to the price of gas. One trend I have noticed is the gap between gasoline and diesel. 20 cents above the price of 87 octane is the price of 89 octane, and 20 cents above that is the price of 91 octane. But almost a dollar above that is diesel fuel.
So why is the price of diesel so much higher than that of gasoline?
A large reason the price of diesel is higher has to do with which vehicles actually use diesel. In America, 98 percent of vehicles are reliant on gasoline, meaning that the market for diesel fuel is small. Diesel fuel is most often used by the freight industry by semi-trailer trucks and trains. This means that for sellers, especially for gas stations in residential areas such as my local 76, selling diesel fuel often does not make sense. For instance, large semi-trucks will rarely stop in Los Altos to fill up their tanks, meaning that there is virtually no demand for diesel fuel. What this means is that at the rare gas stations that do provide diesel fuel, they control a local monopoly on diesel, meaning that they can set prices higher than at the socially optimal price in order to maximize their profits.
Interestingly enough, diesel fuel and heating oil are complementary goods, as they are both made from the same petroleum distillate. The demand for heating oil increases with the onset of cold winter temperatures, while the supply of the petroleum distillate used to make heating oil and diesel fuel remains constant. Because the two are complementary goods, as the demand for heating oil rises in the winter, raising the equilibrium price of heating oil, the equilibrium price of diesel fuel raises as well.
Furthermore, because a large portion of diesel fuel is consumed by the freight industry, the demand for diesel fuel is closely connected to economic growth. This is because, in times of economic growth, consumers are purchasing more products, meaning that there is a higher demand for the shipping of goods. This increase in shipping, in turn, means that freight trains and semi-trucks hauling said goods across the country need to fuel more often, creating a higher demand for diesel fuel. For instance, since 2013, the American economy has grown 9.5 percent, which has created a 6 percent increase in demand for diesel fuel.
While diesel fuel often is more expensive than gasoline, in summer months, it can occasionally be lower. This is because during the summer, the number of drivers on the road increases, raising the demand for gasoline. However, this last happened in 2015 and is very rare.
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